Thoughts

July 28, 2023 | 15:08

U.S. Economy: Resilience 4, Recession 0

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

We’ve been wavering for a while on whether to shift to the soft-landing camp long staked out by Chair Powell and, now, apparently by his staff. Not anymore. Rarely is one economic report the straw that breaks the camel’s back in one’s thinking. But the broad strength shown in the Q2 GDP release has convinced us that the economy is more durable than we thought. Not only is it not slowing, but it may even be gathering steam. Growth has held above long-run potential (of just under 2%) for four straight quarters. Each of the big three drivers—consumers, governments and businesses—are still motoring along with only minimal sign of fatigue. Although residential construction contracted for a ninth straight quarter, it carries too little weight (less than 4%) and looks to have found a floor.

It’s not just GDP that surprised to the upside this week. The labour market is also showing remarkable tenacity. Initial jobless claims plumbed five-month lows last week, suggesting companies remain unwilling to shed staff. Continued claims have turned down since the spring, meaning job growth may be turning up again (we’ll see in next Friday's payrolls report). More jobs and rising real wages are giving consumers a fourth wind, with June real personal spending running the fastest (0.4%) since January's blowout.

While we still expect the economy to stall at the turn of the year, we raised our growth forecast materially for Q3 and Q4 (to 2.0% and 1.0%), pencilling in just one slight decline in Q1, before the expansion resumes. The annual growth rates for 2023 and 2024 were bumped up to 2.1% and 1.0% (from 1.7% and 0.5%, previously). We expect the unemployment rate, currently at 3.6%, to peak at 4.5%, slightly less than before.

If our forecast plays out, it would mark only the third soft landing of the past half century. The only two times the Fed managed to calm inflation without crunching the economy were in the mid-1980s and mid-1990s. But the tightening cycles back then didn't start with such overheated labour markets and rampant inflation. There’s no guarantee Powell and Company can pull off this historical rarity. But the chances just might be better than a coin flip now.